Tony Smith believes the price of a particular underlying, currently selling at $96, will increase substantially in the next 6 months, so he purchases a European call option expiring in 6 months. The call option has an excercise price of $101 and sells for $6.
What is the current value of potential credit risk? (Also an explanation of why if you can)作者: Chuckrox 时间: 2011-7-13 13:35
Since the European Call is our of money at this point in time - the credit risk should be 0, no?作者: Iginla2011 时间: 2011-7-13 13:35
oh.. Potential credit risk could be infinite?作者: Valores 时间: 2011-7-13 13:35
no credit risk, LaGrandeFinale explanation is correct作者: bkballa 时间: 2011-7-13 13:35
I am glad I am not the only one in the zero camp.. CFAI Reading 39, page 288, answer for problem 17.b:
"The current value of potential credit risk is the current market value of the option, which is $6. Of course, at expiration, the option is likely to be worth a different amount and could even expire out of the money"
WTF is CFAI doing here? Are they looking at this from the perspective of the other counterparty and insinuating he hasnt been paid yet and thats why his credit risk would be 6? It certainly doesnt seem there is any way Tony Smith (sounds made-up) has apotential credit risk of $6.作者: lcw77 时间: 2011-7-13 13:35
I would say $6. But, that's only because there's a sample exam problem that's almost identical to this one (maybe the CFA Mock?) and they used the call premium as the potential credit risk.
Who knows, just do what the CFAI says... why question their logic, it's not consistent at times.作者: mar350 时间: 2011-7-13 13:35
It's $6, because the Black–Scholes model calculates the price of European call options. The option price indicates that even though the option is currently out of money, due to time and volatility, it could potentially be in the money at expiration.作者: canadiananalyst 时间: 2011-7-13 13:35
Right, but then for call buyer $6 will be price risk, not credit risk (becouse the other party doesn't have an obligation to pay $6 back).
I am finally confused...作者: NakedPuts00 时间: 2011-7-13 13:35
Related question:
Given - "A call option the bank purchased from a dealer for $30. The current market price of the option is $35"
For the Banks long call option position, the most appropriate estimate of the amount of risk of a credit loss is
A. $0
B. $35
C. $30作者: lcai 时间: 2011-7-13 13:35
is the stock price or the call option price $30? If the strike price is $30, then, $35 is the corect answer, but if the Q is as you stated, then, I don't know how you can get to the answer.作者: mik82 时间: 2011-7-13 13:35
LaGrandeFinale Wrote:
-------------------------------------------------------
> Related question:
>
> Given - "A call option the bank purchased from a
> dealer for $30. The current market price of the
> option is $35"
>
> For the Banks long call option position, the most
> appropriate estimate of the amount of risk of a
> credit loss is
>
> A. $0
> B. $35
> C. $30
35
Edited 1 time(s). Last edit at Saturday, May 29, 2010 at 02:43PM by pupdawg82.作者: dyga 时间: 2011-7-13 13:35
30 is strike. It's from 2010 mock.作者: infinitybenzo 时间: 2011-7-13 13:35
CFAdreams Wrote:
-------------------------------------------------------
> Tony Smith believes the price of a particular
> underlying, currently selling at $96, will
> increase substantially in the next 6 months, so he
> purchases a European call option expiring in 6
> months. The call option has an excercise price of
> $101 and sells for $6.
>
> What is the current value of potential credit
> risk? (Also an explanation of why if you can)
$6, because you've basically loaned the writer of the option $6 for their promise to pay you the face value of that option at an unspecified point in time.
Should that point in time be 5 minutes after you've purchased it, they would theoretically pay you $6 back, which is the BSM price of said option.作者: PalacioHill 时间: 2011-7-13 13:36
it is not consistent, isn't it.
follow the 35 logic, the credit risk should be 96+6 = 102, as you risk on losing holding of this IMPLIED amount?
anyone understand this totally and can explain to a client in plain language?作者: NakedPuts2011 时间: 2011-7-13 13:36
potential credit risk = MV of the option.
the MV of the option already takes into account the spot and strike.
you have not paid the 96, so there is no credit risk there. But you have paid $6. If the option goes to 12 a month from now, then your potential creidt risk is 12.作者: ohai 时间: 2011-7-13 13:36
What about the wording in $35 example??
> Given - "A call option the bank purchased from a
> dealer for $30. The current market price of the
> option is $35"
>
> For the Banks long call option position, the most
> appropriate estimate of the amount of risk of a
> credit loss is
>
"the most appropriate estimate of the amount of risk of a credit loss is..."
why is potential CR most apropriate estimate?? what if probability of default is very low?作者: NakedPuts00 时间: 2011-7-13 13:36
SerGrey Wrote:
-------------------------------------------------------
> Right, but then for call buyer $6 will be price
> risk, not credit risk (becouse the other party
> doesn't have an obligation to pay $6 back).
> I am finally confused...
Market risk and credit risk are opposite to each other. Market risk is a risk that you will lose money due to adverse market moves. Credit risk is a risk that you will make money in the markets but the counter party will not pay off your gains. Let's look at the situation with an option. If A sells a call option to B for $6. A recieves $6 immediately and has no credit risk because there is no situation when B would owe anything to A. However, A's market risk is unlimited because if asset goes up to big time the call pay off will be very high. On the contrary, B's market risk is limited to the premium of $6 that he has already paid but the credit risk he is facing is huge because potentially call option can be very valuable if markets go up. Then current credit risk and potential credit risk are ways of looking at short term and long term credit risk of the position. Does that help?
